Navigating Liquidation: Avoidable pitfalls for Directors Under Pressure

For directors, the point at which a company becomes unable to pay its debts as they fall due is rarely obvious in the moment, and the decisions made in the weeks around that point can follow a director long after the liquidator is appointed. Directors who get the process wrong can find themselves exposed to allegations of trading while insolvent, personal liability for company debts, or a difficult conversation with the Corporate Enforcement Authority further down the line.

Most of the mistakes directors make during liquidation are more to do with unfamiliarity than bad faith. Preparation, proper advice and a clear understanding of what the creditors’ meeting requires make the difference between a process that is difficult but controlled and one that can become potentially damaging.

Drawing on direct experience advising directors through this process, we’ve set out ten of the most common and most avoidable mistakes below.

1. Liquidating too late
The law requires that a company enters liquidation when it is unable to pay its debts as they fall due. This can be a difficult moment in time to recognise. Liquidating after this moment exposes the directors to the possibility of the offence of trading while insolvent and personal liability for the company’s debts in certain circumstances.

2. Inadequate preparation for the creditors’ meeting
The documentation, notice period and time/date/venue of the creditors’ meeting are set out in law. Failing to adhere to these can cause difficulties later in the process. The solution is to engage, in good time, an experienced professional.

3. Poorly prepared Statement of Affairs and Chairperson’s Statement
These are the two key documents required for the creditors meeting. A Statement of Affairs in the correct format should, to the very best of the directors’ ability, include all creditors with the proper amounts due. The chairperson’s statement must include basic information about the company and more importantly, the directors’ side of the story. It should set out:

o how the company got into difficulty
o how the directors responded and
o how the company came to be liquidated.

It should include reference to matters that are likely to arise at the creditors’ meeting so that replies to questions can be directed back to the chairperson’s statement.

4. Not controlling the creditors’ meeting
The creditors’ meeting is the emotional highpoint. Directors ought to be advised by a solicitor or other experienced insolvency professional. The professional should not only be well versed with the law but also have the presence to steer the meeting through the agenda. Directors without an advisor can lose control of the meeting and represent their own position to their disadvantage.

5. Dealing with questions at the creditors’ meeting in an inappropriate way
A good professional will advise the directors to answer all questions honestly and as succinctly as possible. The meeting is being minuted so questions posed and answers given are recorded. There is no expectation that the director will have detailed answers to all questions posed. In those situations, the questioner should be told only what is known to the director at the time of questioning.

The liquidator may follow up incomplete answers after his or her appointment. Speculation has no part to play when replying to questions. The creditors’ meeting is not the place to engage with disputed issues.

6. Employees attending the creditors’ meeting not being properly addressed
When employees attend, they want to know how much they will receive for their remuneration and redundancy entitlements, the taxation position, and when and how they will receive their payments. This work should be done before the meeting. The liquidator should make themself available immediately after the meeting and deal with employee claims as a priority. If this groundwork is done the employees attending will sense that their interests are being addressed in a pragmatic and speedy way.

7. Professionals attending seeking to take control of the creditors’ meeting
Professionals may know a limited amount about the dealings between their client and the company but they understand the protocols of a creditors’ meeting. So expect multiple technical questions which will focus on specific matters relevant to their client. Contentious matters known before the meeting may be outlined in the chairperson’s statement. Creditor representatives may also seek to appoint their own liquidator. As a technical matter the advice of the directors’ advising professional should be followed.

8. Revenue attending the creditors’ meeting not being given the respect their office demands
Revenue have a core of experienced officials who on occasion attend creditors’ meetings, depending on the size of the outstanding tax debt. They will want to ensure that all Revenue debt is fully recognised as preferential or non-preferential.

Revenue representatives may also seek information regarding when the directors realised the company was insolvent and how quickly did they acted thereafter. They may also inquire about asset movements, directors and their families’ salaries, and whether any payments were made in the final months of trading that had the effect of reducing the personal exposure of the directors in an improper way. These points may be addressed in the chairperson’s statement.

9. Trade creditors attending the creditors’ meeting feeling they are being dismissed
Some creditors attending the creditors’ meeting are passive. They may only wish to know arrangements for retention of title. Therefore, know the procedures so it can be dealt with speedily.

Other trade creditors may be exercised over their loss and wish to project that sense of loss citing understandings, commitments given and custom/practices adopted. It is important that exchanges in these situations are kept on a formal footing and that overly detailed responses are avoided. While a questioner may sometimes personalise their queries replies should be truthful, business-like and as brief as the facts allow.

10. Failing to engage meaningfully with the liquidator post the creditors’ meeting
Directors’ desire for closure can mean that they are reluctant to engage with the liquidator after his or her appointment. It is a legal requirement that directors assist the liquidator and this assistance is relevant when the Corporate Enforcement Authority considers the liquidator’s report.

A well-managed process protects you

None of the mistakes above are unusual or inevitable. The difference between a well-managed liquidation and a difficult one comes down to preparation, honest documentation, and having an experienced professional in the room from an early stage and not just at the creditors’ meeting itself.

If you are a director facing financial distress in your company, the choices you make now, and the advice you take, will shape how this process plays out for you personally as well as for the business.

Get in Touch

If you would like to discuss your situation in confidence, our restructuring and insolvency specialist Peter Dawson [email protected] is here to help. We will provide clear, practical guidance to support you at every stage. Check out our Restructuring & Insolvency page for more information.